Software Monetization

Software Monetization Featured Article

Pricing and Packaging: No Longer an Afterthought in Software Monetization

In the past, many software developers saw a clear and simple path to profits: First, make a killer product, then drive down costs, and finally, sell as many units as you can. Lather, rinse and repeat. Unfortunately, this model is no longer practical in the modern, complex world of software monetization. As Amy Konary, research vice president of software licensing, provisioning and delivery at IDC (News - Alert) pointed out in her presentation, “The New Look of Software Monetization,” at Licensing Live US 2012, this is like asking someone to jump into a colorfully painted van driven by a unicorn. It may seem like a good idea at first, but down the road, you may want to jump out of the van, despite the colorful and interesting company on board.

In other words, having a feature-rich product is not enough, especially if the experience is bad for end users. This is because pricing and packaging are more important than ever when it comes to software monetization; these are not concepts that one can just “figure out later.” In fact, Konary outlines several different concerns that software vendors need to keep in mind in order to deal with the new, modern world of software monetization.

Because business strategies change, so, too should pricing strategies, according to Konary. She emphasizes transparency, recommending that companies not hide their pricing or limit quotes to sales calls. It is important to get pricing done fast, and in a flexible, nimble fashion. With trends like mobile access, BYOD, virtualization and cloud driving the market, software vendors need to be able to keep up, ensuring that their pricing and packaging models are up to date.

Konary also focused on the subscription trend in the software monetization space. Features and functions are only part of the experience; the key is to build substantive relationships and then monetize these relationships. Focusing on relationships rather than number of units shipped is a better paradigm for the modern age. Transparency and communication are vital as well, and companies need to commit to doing what is right for the customer even if that means a smaller initial deal. She quoted statistics stating that 57 percent of the 100 largest software vendors used a subscription model last year, and for 16 percent of the top 100 companies, the subscription model represents more than half of their revenue. In fact, the top 25 companies that use the subscription model grew by 17 percent from 2010-2011.

Another factor is usage-based revenue. This provides a more efficient use of services and results in higher utilization rates by current customers. It allows cost to scale up and down depending on utilization and can be implemented alongside other models. Companies need to be aware of real-time as well as historical usage, and pay attention to complexity using sensible metrics and tracking.

Flexibility and control are also extremely important. Every department in a software company has a different approach, like a whole table full of remote controls. But instead of a universal remote, Konary recommends a “mission command” type view. Companies need to take a four-step approach to pricing and packaging: define what they are trying to do; implement plans, entitlements and marketing; measure conversion rates, churn and revenue; analyze the data and start the whole cyclical process all over again from the beginning.

The final – and perhaps most important – point Konary made was concerning the importance of the customer experience. As many have said, we are in the “era of empowerment,” but somehow, software companies don’t feel empowered. She quoted many software end users that are scared of software companies, that find software monetization ambiguous or confusing, and that find pricing to be quite complex and anything but straightforward. Therefore, her emphasis on usage-based pricing; tracking, management and control; and flexibility and simplicity, shows ISVs a clear path toward making their pricing and packaging policies a high priority in the quest for the perfect customer experience. If companies follow these simple steps, they will get results and increase their profits.

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